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CISG CASE PRESENTATION

Russia 23 December 2004 Arbitration proceeding 97/2004 [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/041223r1.html]

Primary source(s) of information for case presentation: Case text

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Case identification

DATE OF DECISION: 20041223 (23 December 2004)

JURISDICTION: Arbitration ; Russian Federation

TRIBUNAL: Tribunal of International Commercial Arbitration at the Russian Federation Chamber of Commerce and Industry

JUDGE(S): Unavailable

CASE NUMBER/DOCKET NUMBER: 97/2004

CASE NAME: Unavailable

CASE HISTORY: Unavailable

SELLER'S COUNTRY: India (respondent)

BUYER'S COUNTRY: Russian Federation (claimant)

GOODS INVOLVED: [-]


Classification of issues present

APPLICATION OF CISG: Yes [Article 1(1)(b)]

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: Articles 50 ; 74 ; 77

Classification of issues using UNCITRAL classification code numbers:

50A [Buyer's right to reduce price for non-conforming goods];

74A ; 74B [General rules for measuring damages: loss suffered as consequence of breach; Outer limits of damages: foreseeability of loss];

77A [Obligation to take reasonable measures to mitigate damages]

Descriptors: Reduction of price, remedy of ; Damages ; Foreseeability of damages ; Mitigation of loss

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Russian): Rozenberg, Praktika of Mezhdunarodnogo kommercheskogo arbitrazhnogo suda pri TPP RF za 2004 g. [Practice of the International Commercial Arbitration Tribunal at the Russian Federation Chamber of Commerce and Industry for 2004] Moscow (2005) No. 49 [351-360]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation)

Queen Mary Case Translation Programme

Tribunal of International Commercial Arbitration of the
Russian Chamber of Commerce and Industry

23 December 2004 [Case No. 97/2004]

Translation [*] by Alexey Kostromo [**]

Edited by Alexander Morari [***]

1. SUMMARY OF RULING

      1.1 The parties, one of which has its place of business in a State that is not a State party to the Vienna Convention 1980 [UN Convention on Contracts for the International Sale of Goods (1980), hereinafter CISG], chose the Russian law as the law applicable to their relations arising from the international sales contract. By virtue of the provisions of the Constitution of the Russian Federation and the CISG, this was a basis for the application of the CISG to the settlement of the dispute and the provisions of the Russian law to issues not governed by the CISG.

      1.2 The Tribunal found that the agreement between the parties limiting the amount of damages to be recovered conformed to the provisions of the applicable law. Considering this, [Buyer]'s claim is granted in an amount that is in compliance with the agreement between the parties.

      1.3 The Tribunal held that the demurrage charges, which have not yet been paid by the [Buyer], may be recovered by the [Buyer] from the [Seller] as damages in accordance with Article 15(2) of the Civil Code of the Russian Federation, that entitles the party whose rights are violated to claim not only the loss that has been actually suffered by it but also the expenses to be made in order to restore the violated rights.

      1.4 The Tribunal also granted [Buyer]'s claim for recovery of the penalty that the [Buyer] had to pay to a third party for the delay in the delivery caused by breaches of the contract committed by the [Seller]. However, as the [Buyer] failed to prove that it took all reasonable measures to mitigate the loss, the claimed amount was reduced in accordance with Article 77 of the CISG.

      1.5 Taking account of the fact that the goods received by the [Buyer] had an expiration date different from that indicated in the contract due to circumstances which depended on the [Seller], the Tribunal granted [Buyer]'s claim for a discount on the price of the goods in the amount established by the practice between the parties in respect of similar goods.

2. FACTS AND PLEADINGS

The action was brought by the [Buyer], a Russian organization, against the [Seller], an Indian organization under a contract for the international sale of goods concluded by the parties on 28 April 2003.

      2.1 The [Buyer] claimed:

   -    Payment of demurrage for the downtime of containers caused by the late customs clearance and certification of the goods because of the expiration of the validity of the necessary documents provided by the [Seller]
 
   -    Recovery of a penalty paid by the [Buyer] to its contractor [a third party] for the delay in the delivery under a separate contract for delivery of the goods which are the subject of the contract between the [Buyer] and the [Seller]; and
 

   -   A 10 percent discount on the price of the goods that were delivered after the expiration date.

      2.2 The [Seller] submitted a statement of defense, admitting in principle its obligation to pay for the demurrage of the containers, but only for 30 days, as required by the agreement between the parties (a joint memorandum). Nevertheless, the [Seller] alleged that the [Buyer] failed to prove the fact that it had paid the demurrage in the first place. The [Seller] contested other claims by the [Buyer] alleging that the [Buyer] concluded its contract with its contractor incautiously. Therefore, the [Seller] should not be held liable for payment of the penalty by the [Buyer] to its contractor, the amount of which is unreasonably high. The [Seller] denied the existence of a practice between the parties of reducing the price of the goods subject to their expiration date. In the opinion of the [Seller], the [Buyer] failed to take measures necessary to mitigate the loss. Also, the [Seller] drew attention of the Tribunal to its timely shipment of the goods and the fact that it provided the [Buyer] with all necessary documents in due time.

2.3 The [Buyer] contested [Seller]'s arguments and requested the Tribunal to grant its claims in full.

3. TRIBUNAL'S REASONING

The ruling of the Tribunal contained the following main points.

      3.1 [Jurisdiction of the Tribunal]

      The subject of the case is a number of claims arising out of the contract of 28 April 2003. Clause 9.1 of the contract contains the arbitration clause, according to which any disputes arising between the parties should be settled by the Tribunal.

At the hearings, the representatives of the [Seller] waived objections to the jurisdiction of the Tribunal to rule on the merits of the present dispute.

Therefore, relying on the arbitration clause in the contract and in accordance with Article 16(1) of the Law of the Russian Federation on International Commercial Arbitration and section 5(1) of the Rules of Tribunal and taking into consideration the absence of objections of the [Seller] with respect to the jurisdiction of the Tribunal, the Tribunal found that the settlement of this dispute falls within its competence.

      3.2 [Applicable law]

      The Tribunal stated that in Clause 9.1 of the contract, the parties have agreed on the Russian law as the law applicable to disputes arising out of the contract.

Considering the fact that the parties reached mutual consent concerning the applicable law, and in accordance with Article 28(1) of the Law of the Russian Federation on International Commercial Arbitration and Clause 13(1) of the Rules of Tribunal, the Tribunal found that Russian law is applicable to the contract. However, considering also that the Russian Federation, being the State where one of the parties to the dispute has its place of business, is a State party to the CISG and taking into account that the provisions of an international treaty are an integral part of the Russian Law (Article 15 of the Constitution of the Russian Federation), the Tribunal found that the CISG applies to the present dispute by virtue of its Article 1(1)(b) CISG.

Taking into account the aforesaid as well as the supremacy of the provisions of the CISG, being an international treaty, over the provisions of the domestic law (Article 15 of the Constitution of the Russian Federation), the Tribunal found that the CISG is applicable to the relations of the parties to the contract and the provisions of the Russian law are applicable to issues not governed expressly by the CISG.

      3.3 [Recovery of demurrage]

      On the [Buyer]'s claim for recovery of demurrage from the [Seller], the Tribunal stated:

            3.3.1 The downtime of containers with the goods in the port of destination caused by the delay of the customs clearance due to the expiration of the validity of the necessary documents is confirmed by the materials of the case and is acknowledged by the [Seller] itself in its electronic mail to the [Buyer] of 20 April 2004.

The materials of the case (invoices of 30 June 2004 No. 004/06 and No. 045/06) also confirm the fact that the [Buyer] demanded that the [Seller] pay the demurrage for container No. TTNU 9833623/40 within 63 days and for container No. GATU 0448736/20 - within 57 days.

As the downtime was caused by [Seller]'s failure to provide in due time the documents necessary for customs clearance of the goods, the recovery of demurrage-related expenses was imposed on the [Seller].

            3.3.2 Determining the amount of the demurrage to be recovered from the [Seller], the Tribunal found that the demurrage-related expenses are subject only to partial recovery on the following grounds: the total sum of the claim for the demurrage includes expenses on the container which are not the subject-matter of the dispute and other expenses (customs clearance, hire, bank charges, etc.) that are not part of the demurrage. Taking account of these facts, the [Buyer] has the right to claim from the [Seller] the payment of the demurrage under invoice No. 004/06 and invoice No. 045/06.

However, the aforesaid sums are subject to adjustment having in mind the following.

The memorandum signed by the parties on 27 April 2004 confirms that the [Seller] agreed to reimburse to the [Buyer] the expenses related to the demurrage for the downtime of the containers in the port of Kotka within 30 days. The Tribunal considers that the aforesaid provision of the memorandum should be interpreted as limiting the amount of reimbursement to the [Buyer]. The expenses related to the demurrage are [Buyer]'s loss, the downtime having been caused by the [Seller]'s fault (which fact is actually acknowledged by the [Seller]). According to the applicable general principle (Article 74 CISG and Article 15 of the Civil Code of the Russian Federation), the loss is subject to full recovery by the debtor to the creditor.

However, Article 15(1) of the Civil Code of the Russian Federation provides for the limitation of the principle of full recovery of loss where there is a special agreement between the parties to a contract.

In Invoice No. 044/06, the amount of the demurrage of container No. GATU 0048735/20 was counted for 57 days of downtime and claimed against the [Seller]. Taking into consideration the aforesaid circumstances, the claim for recovery of demurrage-related expenses is to be granted only for 30 days. 

In Invoice No. 045/06, the amount of the demurrage of container No. TTNU 9833623/40 HC was counted for 63 days of downtime and claimed against the [Seller]. Taking into consideration the aforesaid circumstances, the claim for recovery of demurrage-related expenses is to be granted only for 30 days.

In all other respects, this claim is to be dismissed.

            3.3.3 The Tribunal dismissed the [Seller]'s objections that by virtue of Article 15 of the Civil Code of the Russian Federation the [Buyer] should have provided evidence of the actual expenses suffered. The loss is defined in Article 15(2) of the Civil Code of the Russian Federation not only as expenses actually made but also as the expenses that the party, whose rights have been violated, will have to make in order to restore the violated rights.

As a matter of fact, [Buyer]'s invoices to the [Seller] concerning the demurrage payment are sufficient documents to be used by the [Buyer] in order to prove the amount of the demurrage to be paid and, therefore, entitle the [Buyer] to claim recovery of this amount from the [Seller] without even having to present any proof of payment of the demurrage prior to the date of the hearing of the present case.

      3.4 [Recovery of the damage paid to a third party]

      The claim for the damages caused by [Buyer]'s payment of a penalty to its contractor for the delay in delivery of the goods under contract No. 11-04/KK of 15 April 2004, is to be granted partly in accordance with the following:

            3.4.1 The materials of the case confirm the fact that the [Buyer] paid the penalty to its contractor in rubles (according to payment orders No. 528 of 26 November 2004 and No. 529 of 29 November 2004).

The contract concluded between the parties to this dispute is a contract in foreign currency (dollars) and, therefore, the [Buyer] is entitled to recovery of the corresponding sums of the loss in dollars as well.

            3.4.2 The claim for damages complies with the provisions of Article 74 of the CISG that determines the conditions of recovery of loss and first of all - with the requirements of the foreseeability of loss.

In accordance with Article 74 CISG, damages for a breach of contract may not exceed the loss the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract in the light of the facts and matters of which it then knew or ought to have known, as a possible consequence of the breach of contract.

Both parties confirmed during the hearings that they had had long-lasting business relations which fact was reflected in numerous contracts. In these circumstances, the [Seller], as a professional participant of the market of this kind of goods, could not have been unaware of the fact that the [Buyer] is not the consumer of the delivered goods and that it distributes them on the internal market of Russia, that naturally includes transshipment (resale) of the purchased goods by the [Buyer] to further customers, as was the case in the relations of the [Buyer] with its customer under Contract No. 11-04/KK of 15 April 2004.

Equally, having chosen the Russian law as the applicable law, the [Seller] could not have been unaware that failing to perform its obligations to the [Buyer] it will have to recover the loss suffered by the [Buyer] as a result of paying penalties to its contractor in accordance with the rules of Russian civil law.

The Tribunal notes that concluding with its customer a contract on 14 April 2004 with the terms of delivery of the goods prior to 15 May 2004, the [Buyer] acted within the limits of reasonable caution as it had the right to expect the goods to be delivered by the [Seller] in due time along with a complete set of documents necessary for customs clearance.

The circumstances, which subsequently caused the delay in customs registration, and demurrage of containers and which made it impossible for the [Buyer] to perform its obligations under the contract with its customer in a timely manner, took place after the conclusion of the contract with the latter and the [Buyer] could not have been aware of them at the time of conclusion of the contract. Therefore the Tribunal cannot find convincing [Seller]'s argument that the [Buyer] acted incautiously concluding its contract.

Equally, [Seller]'s argument that the [Buyer] signed a contract with its contractor establishing an excessive penalty for delay in delivery of the goods cannot be accepted because establishing of the amount of the penalty is entirely a matter to be agreed between the contracting parties (i.e., between the [Buyer] and its contractor) and complies with the freedom of contract principle set forth in the CISG and the Civil Code of the Russian Federation (Article 1).

            3.4.3 At the same time, the Tribunal took into consideration [Seller]'s argument concerning [Buyer]'s obligation to mitigate its loss, that is, to minimize it. Indeed, in accordance with Article 77 CISG, a party who relies on a breach of contract must take such measures as are reasonable in the circumstances to mitigate the loss resulting from the breach. If it fails to take such measures, the party in breach may claim a reduction in the damage in the amount by which the loss should have been mitigated.

The provision of Article 77 CISG concerning the obligation of the party who relies on a breach of contract to take adequate measures to mitigate the amount of loss imposes thereby on this party the obligation to submit to the Tribunal the relevant evidence of having taken such measures.

If this party does not rely on these measures and does not submit the relevant evidence upon the statement of the other party to the contract, it is presumed that such measures to mitigate the amount of loss have not been taken by it.

At the same time, according to the meaning of Article 77 CISG, the party in breach may not merely make a reference to the contractor's failure to take measures to mitigate the amount of loss; the party in breach must specify the measures which, in its opinion, could have reduced the amount of the claimed damages. This also applies to the presentation of the sum by which, in the opinion of the party in breach, the amount of claimed damages should be reduced. The party in breach must prove (substantiate) the amount of this sum.

It follows from the materials of the case that, although stating [Buyer]'s failure to take measures to mitigate the amount of loss, the [Seller], neither in its statement of defense nor in the session of the Tribunal, presented any specific evidence concerning measures which should have been taken by the [Buyer] to reduce the amount of loss, nor has the [Seller] pointed out the amount of loss which could have been mitigated in case of taking such measures.

Thus, the [Seller] proceeds from the presumption that it is sufficient for it, as the party in breach, to abstractly refer to the general obligation of the [Buyer] to take measures to mitigate the amount of loss without specifying the measures which could have been taken and without pointing out the amount of loss, which could have been mitigated by the creditor had it taken the appropriate measures. Otherwise, the debtor in breach of an obligation frees itself from [the obligation] to submit any evidence whereby imposing the burden of proof on the creditor.

            3.4.4 At the same time, the Tribunal stated that the provisions of Article 77 CISG concerning the duty of the party who relies on the breach of contract to take measures to mitigate the loss entitle the Tribunal arbitrating the dispute to appraise the conduct of this party when performing its obligations under the contract as to whether its conduct complied with observance of the above mentioned obligation.

Appraising [Buyer]'s conduct from this point of view, the Tribunal found that the [Buyer] had certain possibilities to mitigate the loss suffered by it as a result of non-performance of its obligations to its customer. The amount of the [Buyer]'s loss in the present case is determined only by the amount of the penalty claimed from it for the delay in delivery of the goods to its contractor. Thus, the measures taken by the [Buyer] to mitigate the sum of the penalty paid for the delay in delivery of goods should be considered as the measures taken by the [Buyer] to mitigate the loss suffered by it.

Circumstances which occurred between the [Buyer] and its customer after 20 April 2004, when the [Buyer] was already aware of the impediments to the customs clearance of the goods and especially after signing the memorandum dated 27 April 2004, in Tribunal's opinion, obliged the [Buyer] to appraise the possibility to perform its obligations to its customer with a certain apprehension in respect of observance of the terms of delivery of the goods and to take the appropriate measures, particularly:

   -    To ask the customer for an alteration of terms of the contract and of the possible extension of terms of delivery of the goods;
   -    To suggest to the customer a compensation [for release from an obligation] in accordance with Article 409 of the Civil Code of the Russian Federation;
   -    At the time of payment of the penalty to suggest, in accordance with Article 333 of the Civil Code of the Russian Federation, considering the question of reducing the amount of the penalty because of its excessiveness.

However, such measures were not taken by the [Buyer]; at least no evidence of having taken these or other measures was presented to the Tribunal by the [Buyer].

            3.4.5 In the light of the above-mentioned facts, the Tribunal concludes that both parties must share the negative pecuniary consequences connected with payment by the [Buyer] of the penalty to its customer. At the same time, proceeding from the concept of justice, the Tribunal considers it possible to impose the larger part of liability upon the [Seller] since it was a result of its actions that the [Buyer] suffered the loss; the [Buyer], in its turn, merely failed to take measures to mitigate it.

Taking into account these circumstances, the [Seller] must pay the [Buyer] 80% of the amount of damages; the rest of the damages is imposed on the [Buyer] itself.

      3.5 [Buyer's claim for a discount]

      [Buyer]'s claim for a 10 percent discount [or price reduction] for the goods that were delivered after the expiration date is sound and is granted in full amount.

            3.5.1 In accordance with the provisions of Article 50 CISG, a buyer may reduce the price of the goods in the same proportion as the sum by which the value of the goods was actually reduced. The term of use of the goods is one of the indications of their quality and shortening of the term of use allows the Buyer to seek a proportionate reduction of the purchase price (Articles 472, 475 of the Civil Code of the Russian Federation).

The materials of the case prove that the [Buyer] received the goods with the decreased term of use compared to the contractual terms due to circumstances for which the [Seller] was responsible (demurrage of containers with the goods and delay in customs clearance).

            3.5.2 The arguments given by the [Seller] in its statement of defense concerning the absence of its guilt in shortening of the term of use of the goods cannot be accepted for the following reasons.

As one of its main arguments, the [Seller] refers to the fact that it delivered the goods in due time -- on 13 March 2004 -- and that it is not responsible for all the consequences.

However, the [Seller] fails to take into consideration that not only the date of dispatch of the goods is significant, which according to Article 458(2) of the Civil Code of the Russian Federation determines the moment of the [Seller]'s discharge of its obligation to deliver (the seller as the supplier is considered to have performed its obligation to deliver at the time of handing over the goods to the carrier for delivery of the goods to the buyer), but also the possible (foreseeable) term of delivery of the goods to the point of destination and customs clearance.

These circumstances are important for the case at issue because the run of the term of use of the goods depends on the period of transportation of the goods (time when the goods are in transit). Meanwhile, as indicated in the materials of the case, though the disputed goods were dispatched in time -- on 13 March 2004 -- they reached the port of destination only on 24 April 2004, which is admitted by the [Seller] itself. At the same time, the period of transportation of the goods was increased by the demurrage of containers at the port of destination because of the delay in customs clearance, which in its turn was caused by the expiration of the validity of the documents. Also of significance was the fact that the [Buyer] re-dispatched the goods to its customer, which naturally shortened the term of use of the goods delivered to the ultimate consumer.

As a professional participant in the market for this type of goods, the [Seller] could not have been unaware and could not have failed to take into consideration all the above-mentioned factors concerning the transportation, customs clearance and method of sale of the disputed goods. Since the fact of delivery of the goods with the shortened term of use because of circumstances dependent on the [Seller] is proved by the materials of the case, the [Seller] must reduce the purchase price of the goods.

            3.5.3 Determining the amount of reduction of the price, the [Buyer] rightly referred to the existing business practice (business relations) with the [Seller] usually giving a 10 percent discount. The [Seller]'s argument that such a discount used to be granted for the goods with the same name but of another shape is considered by the Tribunal as unconvincing. In the Tribunal's opinion, the [Buyer] had the right to expect a 10 percent discount in accordance with business custom at least for the whole group of similar (analogous, interchangeable) goods. [Exclusive] application of the notion of "business custom" (business practice) in relation to a definite form of an individual name of goods from a specific product line narrows the meaning of this notion so immensely that it deprives the mentioned notion of any sense.

      3.6 [Fees and expenses]

      In accordance with section 6 of the Rules on Fees and Expenses, which is the Supplement to the Rules of Tribunal, the [Seller] must reimburse the [Buyer] its arbitration expenses in proportion to the satisfied sum of the claim.


FOOTNOTES

* All translations should be verified by cross-checking against the original text. For purposes of this translation Claimant of the Russian Federation is referred to as [Buyer] and Respondent of India is referred to as [Seller]

** Alexey Kostromo is an Attorney at Law at the law firm Konnov & Sozanovsky (Kyiv, Ukraine). He holds an LL.M. degree from McGill University and Master of International Law degree from the Institute of International Relations, Kyiv Taras Shevchenko National University. Since 2003 he has been coaching the Taras Shevchenko University team participating in the Willem C. Vis International Commercial Arbitration Moot.

*** Alexander Morari, born in the Republic of Moldova, has taken part in a number of international moot courts as a member of the Moldovan Team and as the coach of a Russian team.

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